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India Inc profit set to grow, but margins under pressure

India Inc's Q4 results have coincided with general elections and resulting rally on stock markets.

While the BSE Sensex is hitting a new peak almost every other day, investors are anxious if this portends a rise in future cash flows. While the BSE Sensex is hitting a new peak almost every other day, investors are anxious if this portends a rise in future cash flows.

YET another earnings season is here. This time the announcement of financial results for the quarter ended March 2014 has coincided with the general elections and the resulting rally on the stock markets. While the Sensex is hitting a new peak almost every other day, investors are anxious if this portends a rise in future cash flows. What is in store for investors from companies looking at the fourth quarter results? The Indian Express sought the views of leading brokerages and research houses on the performance of India Inc in Q4 of FY14. Excerpts from their reports:

Angel Broking expects an improvement in earnings growth for Sensex as well as its coverage companies, largely due to healthy revenue performance in Q4. For Sensex companies, it expect earnings to grow by 8.7 per cent year-on-year (YoY) and 5 per cent quarter-on-quarter (QoQ) and for its coverage companies, it expects an earnings growth of 8.0 per cent YoY and 7.3 per cent QoQ. In terms of sector-wise contribution to earnings, it expects the bottom-line performance to be supported mainly by the export-driven IT and pharmaceuticals sectors.
On the revenue front too, the performance is likely to be driven by export-oriented companies. It expects Sensex companies to report a revenue growth of 12.2 per cent YoY and 5.7 per cent QoQ. Similarly, its coverage companies are expected to post an 11.8 per cent YoY and 6.0 per cent QoQ growth in top-line. IT and pharma companies, and Tata Motors in the automobile sector are expected to continue contributing to the overall revenue performance.
For this quarter the persistence of headwinds in cyclical sectors is expected to weigh on their margin performance. For the Sensex companies, it expects a margin contraction of 32 basis points YoY and for its coverage universe, it expects margins to contract by 13 bps YoY.

Motilal Oswal expects its universe of 148 companies (excluding three major oil marketing companies IOC, BPCL, HPCL) to report aggregate fourth quarter sales growth of 12 per cent YoY. The double digit growth in sales continues for the third consecutive quarter led by technology, oil & gas, healthcare and private banks. Earnings before interest, tax, depreciation and amortisation (EBITDA) margins have bottomed out. It expects Q4 EBITDA margin at 19.9 per cent which is slightly lower than long-period average of 20.5 per cent.

Companies within Motilal Oswal coverage universe are expected to report aggregate Q4 profit after tax (PAT) growth of 10 per cent YoY. This is lower than 15 per cent YoY witnessed in Q3 and the long period average of 14 per cent. Technology, telecom, healthcare and media are expected to report less than 20 per cent of PAT growth.
Private banks, consumer goods and utilities are expected to report less than 10 per cent PAT growth. Capital goods and PSU banks are expected to report significant decline in PAT growth, the latter being 22 per cent. Other cyclical sectors such as auto, metal, cement and real estate are expected to report near-flat PAT growth. While the overall financial sector is expected show negative 0.5 per cent PAT growth, private banks and NBFCs are expected to perform better clocking 13 per cent and 14 per cent PAT growth, respectively.
Decent performance by export-led sectors is likely to continue driving the Q4 aggregate results for Emkay Global coverage companies. However, as compared to Q3, some moderation in sales, EBIDTA and PAT is expected on the back of rupee appreciation. The Emkay universe (ex-financial, oil & gas) is expected to see a profit growth of 7.9 per cent (24 per cent in Q3) on the back of deceleration in sales growth at 10.9 per cent, from14.5 per cent in Q3. EBIDTA margin is expected to rise 58 bps YoY (180 bps in Q3), while EBIDTA is to grow 14.2 per cent (25.7 per cent in Q3).
Outside of financial and oil sectors, stronger PAT expansion is expected from telecom (82.4 per cent), auto ancillaries (40.5 per cent), IT services (27.6 per cent), power (25.4 per cent) and pharma (24.9 per cent). Stress is likely to be seen in engineering and capital goods (-27.9 per cent), construction (-25.1 per cent), cement (-20.3 per cent), automobiles
(-2.6 per cent) and media (-0.9 per cent).
Kotak Securities expects the net income of its universe to increase 6.1 per cent YoY and 6.9 per cent QoQ on an ex-energy basis. It expects a YoY increase in the net income of the consumer products and technology sectors and a decline in the net income of the automobiles, banking and energy sectors. It expects oil marketing companies to report huge profits, given a likely large compensation from the government. In the banking sector, it expects PSU banks to report weak earnings as they face an adverse tax rate, and private banks/NBFCs face headwinds from slow loan growth and rising credit costs. It also expects the earnings of the BSE-30 Index to increase 7.4 per cent YoY and 1.4 per cent QoQ. On an ex-energy basis, it expects the earnings of the BSE-30 Index to grow 6.4 per cent YoY and 3.9 per cent QoQ.
Export-oriented sectors will continue to witness robust revenue growth, led by rupee depreciation, while in infrastructure- and investment-linked sectors, growth will be subdued owing to a weak investment climate.
Revenue growth rebounded in Q2 and Q3, averaging over 10 per cent YoY. However, growth in Q4 will slow to 7-9 per cent. This is mainly due to the high base of the corresponding quarter last year for sectors such as capital goods, real estate, cars & utility vehicles, and one-time benefits such as recovery of past dues and higher incentives in Q4 FY13 for power and coal, respectively.
EBITDA margins for the quarter are likely to remain unchanged at 17-17.5 per cent given the continued weakness in investment-linked sectors on account of delays in land acquisition, clearances and project execution. But export-led sectors, together with telecom, should see their margins expand 150-200 basis points. Net profit margins are expected to be under pressure in Q4, particularly for construction, real estate, metals and capital goods sectors.

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